Restaurant Brands International Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Figures are in U.S. dollars unless noted. RBI operates Tim Hortons and Burger King, with 19,564 restaurants in more than 100 countries and territories; approximately 100% of system restaurants were franchised.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenues | $1,040.2 million | $1,042.2 million | $1,958.7 million | $1,975.5 million |
| Income from operations | $424.0 million | $302.1 million | $754.6 million | $526.2 million |
| Net income | $247.6 million | $93.8 million | $415.9 million | $144.4 million |
| Net income attributable to common shareholders | $90.9 million | $11.0 million | $140.9 million | $2.7 million |
| Diluted EPS | $0.38 | $0.05 | $0.59 | $0.01 |
| Adjusted EBITDA | $479.1 million | $427.8 million | $886.9 million | $782.9 million |
| Net cash from operating activities | Not stated separately | Not stated separately | $505.3 million | $508.2 million |
Q2 operating margin was approximately 40.8% versus 29.0% a year earlier; net margin was approximately 23.8% versus 9.0%. These percentages are calculated from reported figures. Adjusted EBITDA, a non-GAAP measure, increased 12.0% for Q2 and 13.3% for the first half; Q2 Adjusted EBITDA margin was approximately 46.1% versus 41.0%.
- Q2 revenue was nearly flat; first-half revenue declined 0.9%. Currency translation weighed on reported revenue: management cited an unfavorable FX impact of $39.1 million for Q2 and $109.7 million for the first half.
- Comparable sales growth slowed: TH was 2.7% in Q2 versus 5.5% in the prior-year quarter; BK was 0.6% versus 6.7%. Management attributed TH growth to product launches and BK performance to strength in Asia Pacific and Latin America/Caribbean, offset by softness in the U.S. and Canada.
- Q2 segment income was $279.0 million for TH, up 18.8%, and $200.1 million for BK, up 3.7%. Reported system-wide sales growth was 4.8% for TH and 5.9% for BK.
- Operating income improved substantially as operating costs fell despite nearly unchanged revenue. Prior-year comparisons included $27.4 million of TH transaction and restructuring costs in Q2 and a $39.9 million loss on early extinguishment of debt; neither recurred in Q2 2016. Current-period integration costs were $3.8 million for Q2.
Cash, debt and liquidity
- Cash and cash equivalents were $998.1 million at June 30, 2016, up from $757.8 million at December 31, 2015. Working capital was $493.8 million.
- Long-term debt, net of current maturities, was $8,425.2 million; total debt, net of discounts and financing costs and including current maturities, was $8,501.7 million. Capital leases were $306.5 million in total. The company described itself as highly leveraged.
- The revolving credit facility had $498.5 million available and no borrowings outstanding. RBI reported compliance with debt covenants.
- First-half cash from operations was $505.3 million; investing activities provided $11.8 million, including $12.8 million of property and equipment payments; financing activities used $283.0 million. Cash increased $240.3 million over the half-year.
- Interest expense was $117.2 million in Q2 and $232.3 million for the first half. The weighted-average long-term debt interest rate was 5.2% for the first half. Preferred shares carry a 9% cumulative dividend; quarterly payments were $67.5 million.
Outlook, risks and other notable items
- RBI gave no specific revenue, earnings or comparable-sales guidance. Management stated that operating cash flow and revolver availability were expected to cover obligations, preferred dividends, debt service and capital spending for the next 12 months.
- Management highlighted substantial indebtedness, interest-rate and foreign-exchange volatility, hedging effectiveness and counterparty performance, restructuring, and tax-law changes as risks. Derivatives are used to manage currency and interest-rate exposures.
- The company expected the new lease accounting standard to have a material financial-statement impact, given its significant lease arrangements; the impact was still under evaluation.
- Subsequent to quarter-end, the board declared a common-share dividend of $0.16 per share and authorized up to $300 million of common-share repurchases over five years.
- Disclosure controls were reported effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether operating-profit and Adjusted EBITDA growth is sustainable apart from the non-recurrence of prior-year transaction costs and debt-extinguishment loss.
- Track comparable-sales momentum, particularly BK’s low Q2 growth and the reported softness in the U.S. and Canada.
- Review the effects of foreign exchange, franchise conversions and refranchising on reported sales, margins and cash flows.
- Evaluate the debt burden, scheduled debt service, 9% preferred dividend obligation, and capacity for common dividends and the newly authorized repurchases.
- Consider that operating cash flow was approximately flat year over year despite much higher net income, and examine the working-capital movements underlying the difference.